Buy a Home or Pay for College?

Julia M. Carlson |

With the cost of college education increasing at a rate approximately double that of inflation, a toddler today will need to have about the cost of an average home to pay for four years at a public school in Oregon. That’s startling and scary at the same time.

Most parents and grandparents are beginning to think of ways to help get their kids the education they deserve instead of thinking about a new home purchase. Plus, there are a number of tax-advantaged ways to make college more reasonable and affordable for the next generation. One of those ways is a 529 Savings Plan. These plans, some of which have income tax deduction benefits in Oregon, work much like an investment into an IRA or 401(k), in that the investment grows tax-deferred in various investment products. When used for qualified education expenses, distributions are federally tax-free, and generally state tax-free too. Another benefit is that parents and grandparents can contribute up to $14,000 per year towards each child, without incurring the dreaded gift tax. Spouses can also contribute, essentially doubling this maximum amount each year.

Are your kids or grandkids already in school? A cash gift of the same amount defined above is another great option. You can even pay the school directly if you’re concerned about reaching the lifetime gift exclusion for larger estates.

Another contribution option is a Coverdell Education Savings Account, which can also be used at the younger grade-school levels. The contribution limits are much lower (currently $2,000 per beneficiary per year) and also have limits based on the contributor’s adjusted gross income.

To better help your young person avoid the expense of rising tuition costs, it may be worth your effort to research contribution options by talking with your investment advisor and/or tax advisor to structure the best plan for your situation. This is also a great time to think about asking your parent or grandparents to contribute to your child’s college learning instead of plastic toys and the computer games. Who knows, maybe you’ll get both!

Information in this material is for general information only and not intended as investment, tax or legal advice. Please consult the appropriate professionals for specific information regarding your individual situation prior to making any financial decision.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Excessive contributions to a Coverdell may be subject to a 6% excise tax penalty. Coverdells may also affect financial aid eligibility and non qualified withdrawals may be subject to both income taxes and a 10% penalty.

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